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    United Parcel Service Inc (UPS)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$145.18Last close (Jul 22, 2024)
    Post-Earnings Price$130.14Open (Jul 23, 2024)
    Price Change
    $-15.04(-10.36%)

    What went well

    • UPS expects strong volume growth and operating profit improvements in the second half of 2024, including double-digit growth in U.S. Domestic operating profit in Q3 and exiting the year with a 10% operating margin in the U.S. business.
    • The pending acquisition of Estafeta in Mexico will significantly enhance UPS's position in North America, creating a $1 billion-plus business, covering 95% of the population in Mexico with 145 facilities, and supporting the company's near-shoring strategy.
    • UPS's focus on high-growth areas like healthcare and SMBs is yielding positive results, with the Digital Access Program (DAP) revenue growing 7.7% year-over-year, now with 38 partners worldwide and over 5.8 million shippers.

    What went wrong

    • UPS is experiencing a shift in customer preferences towards lower-yield services, with customers trading down from air to ground and from ground to SurePost, which pressures revenue per piece and margins.
    • B2B volume is down year-over-year, as customers who left during the contract negotiations have not yet returned, impacting higher-margin segments of the business.
    • Industry oversupply and negative yields suggest a lack of pricing power, which may hinder UPS's ability to improve margins despite peak season surcharges.

    Q&A Summary

    1. Domestic Package Volume and Mix Effect
      Q: What's happening with domestic package volume and mix, and how will it improve?
      A: We observed two significant impacts on our domestic volume in Q2. First, customers favored our more economical products, shifting from air to ground, and within ground, from ground to SurePost. Second, new e-commerce entrants with different models extensively leveraged our SurePost product. We expect this mix to rationalize towards the end of the year, as indicated in our forecast, and we're actively working to balance our product mix in the second half.

    2. Margin Outlook and RPP Trends
      Q: What is the margin outlook for the upcoming quarters, and how are RPP trends impacting it?
      A: We anticipate our U.S. domestic package EBIT to increase by 10% to 15% in Q3, with growth moderating in Q4 as comparisons level out. Revenue per Piece (RPP) growth is expected to moderate from negative 2.6% to near breakeven by year-end. We have confidence in achieving our second-half forecast due to a strong volume pipeline and cost efficiencies from our Fit to Serve program, which has reduced 11,500 resources, or 90% of our target.

    3. Peak Season Surcharges and Pricing Power
      Q: Are we at an inflection point to push prices more aggressively with peak surcharges?
      A: This year's peak season is highly condensed, with only 17 days between Thanksgiving and Christmas. We expect December 18 to be the highest volume day ever. To service this demand efficiently, we must charge appropriately. The peak surcharges reflect this need and are set to stick due to the tight demand environment. Additionally, we're moving from the art to the science of pricing using new tools, allowing us to provide value to customers while enhancing our margins.

    4. Focus on Value Over Volume
      Q: Has UPS shifted focus from value over volume by accepting lower-value volume growth?
      A: We're not chasing volume. We accepted new customers with certain volume expectations that exceeded what we anticipated. While their demand was higher, we're committed to focusing on segments that value our end-to-end network. Our "Better, Not Bigger" strategy remains intact, and we'll manage through this by leveraging the increased volume to drive productivity improvements throughout our network.

    5. Adjusting Network and Fixing Profitability
      Q: How will you adjust the network and fix profitability at current levels?
      A: We're accelerating our Network of the Future initiative. We've closed 35 operations this year and plan additional closures in the second half. We're also launching 23 new projects to drive automation and efficiency. Internationally, we've flattened our structure, eliminating a layer to speed up decision-making and improve margins. These actions will enhance productivity and reduce costs, contributing to improved profitability.

    6. Managing Largest Customer and Returns Business
      Q: Will you meter growth from new e-commerce customers, and what's the size of your returns business?
      A: We continue to optimize our relationship with our largest customer, representing 11.5% of total revenue, consistent with last year. For new e-commerce entrants, we focus on serving segments that respect our end-to-end network. Our returns portfolio, including the integration of Happy Returns, is a unique offering that drives growth in our B2B segment, leveraging both digital capabilities and our physical UPS Store footprint.

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